Reed Smith Client Alerts

Key takeaways

  • While the UK offshore wind industry is expected to grow in the coming years, it is also facing immense challenges.
  • Rising inflation, interest rates and wider supply chain issues create concurrent uncertainty for this established market.

Authors: Eleni Alexiou

The UK is a global leader in offshore wind, boasting roughly 20 per cent of global offshore wind capacity, with 13.7GW fully operational in 2022. The Offshore Wind Sector Deal,1 signed in 2019, targeted 30GW by 2030. However, the government soon thereafter increased the ambition to 50GW by 2030 in order to meet the target for net-zero greenhouse gas emissions by 2050 pursuant to the Climate Change Act 2008. The world’s four largest operational wind farms are based in the UK, while just last year the UK installed 300 new offshore wind turbines, with Contracts for Difference (CfD) contributing towards 29GW of total wind capacity (both offshore and onshore), powering the equivalent of around 24 million homes.

What is a CfD?

In this context, a CfD is a long-term contract between a low-carbon electricity generator and the government-owned CfD counterparty, the Low Carbon Contracts Company. A CfD sets a fixed price, known as the strike price, for the electricity produced by the generator. The generator sells the electricity in the wholesale market. When the market price is below strike price, the generator receives a top-up payment (premium) from the CfD counterparty. When the market price is above strike price, the generator must pay back the difference to the CfD counterparty.

The CfD auctions are fundamental for the UK electricity sector’s decarbonization policy and were introduced as part of the government’s 2013 Electricity Market Reform. CfD auctions were launched in 2014, ensuring that projects receive a guaranteed price from the government for the electricity they generate, providing developers (and, critically, banks and others providing developers with the significant amount of capital needed to build these projects) with revenue certainty and, as a result, confidence to invest in the UK. CfDs are awarded through a series of competitive auctions rounds, where the lowest price bids are successful.